Alternative Arrangement

Suddenly it seems that there's talk everywhere about the demise of the billable hour. Given its longstanding resilience, it's worth asking: Is this the "new normal" or just temporary hype?

I doubt that we'll ever see the complete elimination of the billable hour. Some legal assignments are too unique to estimate in advance. Paying by the hour for such services can make good economic sense.

But there's little doubt that the billable hour is experiencing a strong and probably permanent decline.

At Microsoft we expect that 45 percent of this year's and more than half of next year's U.S. spending likely will be based on alternative billing arrangements. The reason we're interested in alternative billing arrangements is simple--efficiency. We want to align economic incentives so both client and firm are motivated to make legal services more productive. In the medium and long term, that should lead to lower costs.

But this isn't a zero sum game between clients and firms. More efficient legal processes can also help law firms become more profitable. For example, a well-structured fixed fee arrangement incents a law firm to increase profitability by becoming more efficient and reducing its costs.

Greater efficiency also frees resources for investment in new projects and services. For example, every year at Microsoft we would file additional piracy and counterfeiting cases if we had added resources. Efficiency savings on each case enable us to pursue more of them.

We also believe that efficiency gains enhance the quality of legal services and boost employee morale. The efficient design of legal processes enables lawyers and paralegals to spend more of their time on areas where they add the most value. And typically, this leads to more enjoyable work as well.

The difficult question is how to make legal processes more efficient.

We've been working broadly the past few years to improve the efficiency of our internal legal processes. We've learned a tremendous amount from these efforts. One next frontier is working with key law firms on legal processes that involve both inside and outside personnel. As we address this, we're focused on applying three lessons in particular.

First, the streamlining of legal processes requires real expertise in business analytics. We've added to our department a small team of business professionals with strong backgrounds in business process design and Six Sigma analysis. We've invested in information technology tools needed to augment this expertise. And we've worked to forge strong partnerships between lawyers and business professionals, so they can work together to boost efficiency and improve quality. We've realized substantial benefits.

Second, we've learned that the biggest gains not surprisingly come in legal processes that are pursued in high volume. Repeatable legal projects provide the best opportunities to create accurate baselines for current methods and costs. Process improvements then generate bigger gains because of their application across higher volume. And in a fixed fee arrangement, the higher volume of projects helps amortize the risk of a pricing error in any one instance. Given this, the dynamics of fixed fees weigh in favor of consolidating more legal work with fewer law firms.

Third, all of the business analysis in the world relies on one value that is even more fundamental--trust. Process improvement is new terrain for lawyers, and inevitably there will be mistakes. Clients and firms need to be prepared to step back together and revisit a fee arrangement if false premises emerge or circumstances change.

Ultimately, the shift away from the billable hour toward sustained progress in legal productivity requires a deeper partnership between clients and firms. For law firms that are proactive and farsighted, this is one of the biggest benefits.

Contributing Author

Brad Smith

Brad Smith has nearly 20 years of leadership experience in the web consumer, enterprise software and communication service provider industries, spanning sales and marketing, product...